The International Consolidated Airlines (LSE:IAG) share price has been on a rampage over the last 12 months. The long-haul airline’s seen its valuation shoot up by almost 90%. And while there has been some unsurprising profit-taking in recent weeks, analyst forecasts predict more growth could be just around the corner.
So what’s behind these spectacular results? And could IAG shares fly even higher in 2025?
British Airways leads the charge
Ignoring one-time expenses, operating profits in 2024 surged by 26.7%, reaching €4.4bn, thanks to both higher passenger volumes and lower fuel costs. The group’s available seat kilometres – a proxy for capacity – came in 6.2% higher. However, zooming into the performance of British Airways, in particular, revealed some jaw-dropping gains.
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Following the firm’s £7bn transformation programme, margins for British Airways landed at 14.2%, making rapid progress towards hitting management’s 15% medium-term target. Consequently, operating profits exploded from £1.34bn to £2.05bn – a 53% year-on-year jump.
Combined with respectable results from its other airlines, such as Iberia and Aer Lingus, IAG’s overall operating margins climbed from 11.9% to 13.8%. That puts the group firmly ahead of its European competitors such as Air France (4.7%) and Deutsche Lufthansa (4.1%).
Pairing all this with a €2.2bn jump in free cash flow, management was more than comfortable to announce a €1bn share buyback scheme just a few days prior to completing the previously launched €350m scheme in November.
Where can the stock go from here?
Given the strong financial performance and rise in demand for leisure travel, it’s not surprising to see investor sentiment surrounding IAG improve compared to a few years ago. However, it seems analysts don’t believe the growth story’s over.
The 17 institutional analysts following the business currently have an average 404.7p 12-month price target for IAG shares. That suggests shareholders could be about to reap another near-40% gain by this time next year.
However, while that’s undeniably exciting, forecasts need to be taken with a healthy pinch of salt. Not every analyst is as optimistic, with one predicting the stock could actually tumble to as low as 168.6p. And to be fair, there’s some room for pessimism.
While leisure travel demand’s rising rapidly, the same can’t be said for business travel. With the world adopting more online meeting solutions following the pandemic, management doesn’t expect business travel to recover to pre-pandemic levels.
Meanwhile, IAG’s aircraft fleet has an average age of 12.5 years, indicating the retirement of old aircraft and the purchase of new planes in the coming years. In fact, capital expenditures in 2025 are expected to rise from €2.8bn to €3.7bn. Subsequently, free cash flow‘s likely to come under pressure, especially if fuel prices start to rise again.
The bottom line
All things considered, I’m cautiously optimistic about IAG’s future performance. Management seems to have sucessfully navigated the nightmare of Covid-19 and delivered a leaner, more efficient enterprise in the process. I’m not looking for exposure to this sector, so this isn’t a stock I’m rushing to buy right now.
However, for investors who want to capitalise on the tailwinds of rising travel demand, IAG could be worth a closer look.
